Unilever 2006 Annual Report Download - page 77

74 Unilever Annual Report and Accounts 2006
Financial Statements (continued)
Notes to the consolidated accounts Unilever Group
1Accounting information and policies
The accounting policies adopted are essentially the same as those
which applied for the previous financial year. Changes arising from
interpretations or amendments of applicable accounting standards
are set out below under the heading of ‘Companies legislation and
accounting standards’.
Unilever
The two parent companies, NV and PLC, together with their group
companies, operate as a single economic entity (the Unilever Group,
also referred to as Unilever or the Group). NV and PLC have the same
Directors and are linked by a series of agreements, including an
Equalisation Agreement, which are designed so that the position of
the shareholders of both companies is as nearly as possible the same
as if they held shares in a single company.
The Equalisation Agreement provides that both companies adopt
the same accounting principles and requires as a general rule
the dividends and other rights and benefits (including rights on
liquidation) attaching to each €0.16 nominal of ordinary share capital
of NV to be equal in value at the relevant rate of exchange to the
dividends and other rights and benefits attaching to each 31⁄9p
nominal of ordinary share capital of PLC, as if each such unit of
capital formed part of the ordinary capital of one and the same
company. For additional information please refer to ‘Corporate
governance’ on page 39.
Basis of consolidation
Due to the operational and contractual arrangements referred to
above, NV and PLC form a single reporting entity for the purposes
of presenting consolidated accounts. Accordingly, the accounts of
Unilever are presented by both NV and PLC as their respective
consolidated accounts. Group companies included in the consolidation
are those companies controlled by NV or PLC. Control exists when the
Group has the power to govern the financial and operating policies of
an entity so as to obtain benefits from its activities.
The net assets and results of acquired businesses are included in the
consolidated accounts from their respective dates of acquisition, being
the date on which the Group obtains control. The results of disposed
businesses are included in the consolidated accounts up to their date
of disposal, being the date control ceases.
Companies legislation and accounting standards
The consolidated accounts have been prepared in accordance with
International Financial Reporting Standards (IFRS) as adopted by
the EU, including interpretations from the International Financial
Reporting Interpretations Committee (IFRIC) and the Standing
Interpretations Committee (SIC), and with Book 2 of the Civil Code
in the Netherlands and the United Kingdom Companies Act 1985.
The accounts areprepared under the historical cost convention unless
otherwise indicated.
The accounting policies adopted areconsistent with those of the
previous financial year except that the Group has adopted the
following IFRIC interpretations with effect from 1 January 2006.
Adoption of these interpretations did not have a material effect
on the financial statements of the Group.
•IFRIC 4 ‘Determining Whether an Arrangement Contains a Lease’,
provides guidance in determining whether arrangements contain
a lease to which lease accounting must be applied.
•IFRIC 5 ‘Rights to Interests Arising from Decommissioning,
Restoration and Environmental Rehabilitation Funds’, establishes
the accounting treatment for funds established to help finance
decommissioning for a company’sassets.
The Group also applied the amendment to IAS 39 ‘Financial
Instruments: Recognition and Measurement’ and IFRS 4 ‘Insurance
Contracts’ which requires that financial guarantee contracts are
accounted for as financial instruments, initially recognised at fair value.
As the Group has no material external financial guarantees, the
amendment did not have a material effect on the financial statements.
In addition, the Group has applied the following changes in
presentation of the financial statements:
•Within the income statement, costs and revenues relating
to restructuring, business disposals and impairments are
shown separately;
•Within the balance sheet, current tax assets were previously shown
net within current tax liabilities. These are now reported separately
on a gross basis; and
•Secondary reporting segments are presented in four reporting
segments, as opposed to six reporting segments in 2005. Further
information is provided on page 81.
Foreign currencies
Items included in the financial statements of group companies are
measured using the currency of the primary economic environment in
which each entity operates (its functional currency). The consolidated
financial statements are presented in euros. The functional currencies
of NV and PLC are euros and sterling respectively.
Foreign currency transactions are translated into the functional
currency using the exchange rates prevailing at the dates of the
transactions. Foreign exchange gains and losses resulting from the
settlement of such transactions and from the translation at year-end
exchange rates of monetary assets and liabilities denominated in
foreign currencies are recognised in the income statement, except
when deferred in equity as qualifying hedges. Those arising on trading
transactions aretaken to operating profit; those arising on cash,
financial assets and borrowings areclassified as finance income or cost.
In preparing the consolidated financial statements, the income
statement, the cash flow statement and all other movements in assets
and liabilities aretranslated at annual average rates of exchange.
The balance sheet, other than the ordinary sharecapital of NV and
PLC, is translated at year-end rates of exchange. In the case of hyper-
inflationary economies, which arethose in which inflation exceeds
100% cumulatively over a three-year period, the accounts are
adjusted to reflect current price levels and remove the influences
of inflation before being translated.
The ordinary share capital of NV and PLC is translated in accordance
with the Equalisation Agreement. The difference between the
resulting value for PLC and the value derived by applying the year-end
rate of exchange is taken to other reserves (see note 23 on page 110).
The effects of exchange rate changes during the year on net
assets at the beginning of the year are recorded as a movement in
shareholders’ equity, as is the difference between profit of the year
retained at average rates of exchange and at year-end rates of
exchange. For these purposes net assets include loans between group
companies and related foreign exchange contracts, if any, for which
settlement is neither planned nor likely to occur in the foreseeable
future. Exchange gains/losses on hedges of net assets are also
recorded as a movement in equity.
Cumulative exchange differences arising since the transition date
of 1 January 2004 are reported as a separate component of other
reserves (see note 23 on page 110). In the event of disposal or part
disposal of an interest in a group company either through sale or as
aresult of a repayment of capital, the cumulative exchange difference
is recognised in the income statement as part of the profit or loss
on disposal of group companies.
Business Combinations
Business combinations areaccounted for using the acquisition
accounting method. This involves recognising identifiable assets
and liabilities of the acquired business at fair value.
Acquisitions of minority interests areaccounted for using the parent
entity method, whereby the difference between the consideration
and the book value of the shareof the net assets acquired is recognised
as goodwill.